Draghi Shields Catalan Independence Bid From Market: Euro Credit

Mario Draghi’s pledge to buy bonds from euro-region governments is allowing the independence movement in Catalonia to advance its cause without facing resistance from investors. Photographer: Jasper Juinen/Bloomberg

May 30 (Bloomberg) -- European Central Bank President Mario
Draghi’s pledge to buy bonds from euro-region governments is
allowing the independence movement in Catalonia to advance its
cause without facing resistance from investors.

The yield on Catalonia’s 2020 bonds remained close to a
record low as regional leaders prepare for a Nov. 9 referendum.
Pro-referendum parties won 62 percent of the regional vote in
European Parliament elections on May 25.

While Draghi took credit for salvaging the euro by creating
a program to buy government debt in 2012, that commitment is
also allowing politicians to sidestep the market discipline that
might otherwise check their bolder ambitions. A Catalan
secession would cost Spain 10 percent of its tax revenue and
trigger a row over how to carve up the sovereign’s 836 billion
euros ($1.1 trillion) of debt.

“Draghi’s magic words are softening the impact of the
Catalan conflict,” said Antonio Roldan, a London-based analyst
at Eurasia Group, which advises bond investors on political
risk. “If the situation in Catalonia unravels and the threat of
a messy rupture becomes apparent it would not be ECB’s role to
intervene, so the correction could be aggressive.”

Catalan bonds were little changed today, with the 2020
yield at 2.92 percent at 2:18 p.m. Madrid time, compared with a
low of 2.89 percent on May 28. The premium over Spanish bonds of
a similar duration was 105 basis points, near a 23-month low.

Separatist Arguments

The vote planned by the Catalans would come less than two
months after a referendum on Scotland leaving the U.K.

The increasingly acrimonious argument there also has
involved the division of debt and whether the new independent
state would have access to a lender of last resort and remain in
the European Union without having to reapply for membership.

Independence could force the 7.6 million Catalans out of
the EU and shut off Barcelona-based lenders such as CaixaBank SA
from central bank funding, Bank of Spain Governor Luis Maria
Linde said last year.

“At the moment, no economic indicators are reflecting the
seriousness of the territorial problem,” Josep Duran i Lleida,
leader of the Catalan nationalist Convergencia i Unio group in
the Spanish parliament, said at a conference in Sitges, near
Barcelona today. “If this is not resolved, there will be
consequences for all sides.”

Families and companies in Catalonia paid 7.3 billion euros
to the Spanish state in the first three months of the year, the
second-biggest contribution after Madrid. That compares with a
total of 70 billion euros collected by the central government in
the period, data compiled by General Comptroller Office show.

Ballot Boxes

As financial pressures recede, Catalan President Artur Mas
is pushing through legislation that will allow him to call the
vote in November, and is ready to order the delivery of about
6,000 ballot boxes, La Vanguardia reported May 23.

Should Spain’s Constitutional Court opt to block the vote,
Mas has the further possibility of dissolving the Catalan
assembly and holding regional election as a de facto referendum.

The Scottish referendum on Sept. 18 by contrast is being
held with U.K. Prime Minister David Cameron’s consent. Spanish
premier Mariano Rajoy, for his part, has the right to suspend
the Catalan government’s powers under extreme circumstances.

“The consequences are so damaging for both sides that
investors rationalize the issue and say that won’t happen,”
said Ignacio de la Torre, a Madrid-based analyst at Arcano
Group, which caters to international investors interested on
Spanish equities and fixed income. “The support from Draghi to
asset prices has put any risk well below the investor radar.”

Rescue Loans

A secession of Catalonia would also raise questions over
rescue loans funded with central-government debt. Catalonia
borrowed 31.6 billion euros of loans from the facilities,
according to Catalan government presentation.

While the money allowed Catalonia to pay suppliers, doctors
and teachers, and stay away from the bond markets since 2011,
the country’s debt is increasing, and could reach 101.7 percent
of the economy next year, based on government estimates.

The Spanish Social Security also paid 4.3 billion euros in
pensions and other subsidies to Catalans between January and
March compared with 1.4 billion euros of contributions it
received from the region, government data show.

Even so, the three pro-independence referendum parties saw
their support increase by eight percentage points in the
European Parliamentary elections compared with the results of
the 2012 election for the regional assembly, according to the
Catalan government’s website.

Clear Position

Esquerra Republicana de Catalunya, the party pushing
hardest for independence, won the most votes in the region with
a 24 percent support, beating its senior partner in the
governing coalition, Mas’s CiU, by 1.8 percentage points.

Those results will “reinforce the Catalan government’s
attitude toward independence,” said Joan Barcelo, a researcher
in political science at New York University. Voters are “moving
toward ERC’s more clearly pro-independence position.”

Any investors considering betting against Catalan or
Spanish debt will probably be deterred by the outlook for next
week’s ECB governing council meeting 700 miles north in
Frankfurt, according to Ivan Comerma, chief investment officer
at Morabanc Grup SA, which manages 6.5 billion euros.

At the June 5 meeting, Draghi will decide what to do about
the euro area’s sluggish inflation, after saying last month he’s
“comfortable” with easing policy.

The prospect of “quantitative easing is so powerful that
no investor would like to get caught shorting Spanish bonds on
concerns about any potential risk from tensions with
Catalonia,” said Comerma, who isn’t adding Spanish or Catalan
bonds due to low yields. “If there wasn’t the Draghi effect
investors would be already more focused on this risk, so he will
face a dilemma if things unravel.”